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Thursday, November 29, 2007

When Can Insurance be a Bad Deal?

How you ever been to see a doctor who is obviously upset about something that has nothing to do with you? This has happened to me a couple of times where a doctor was complaining about something and I had little choice but to sympathize even though I was much more concerned about my own problems. Otherwise, why would I be seeing a doctor?

One of these times the doctor was having a problem with her extended health coverage for topping up the basic Ontario government medical coverage. Her partners wanted her to go in with them on a plan that cost $400 per month for each doctor, but she saw in the fine print that the plan had a lifetime cap on all benefits of $25,000. She correctly figured out that she would pay $25,000 in premiums in just a little over 5 years.

I asked her if she could afford to pay $25,000 right now if she had some sort of medical problem, and she said yes, which isn’t too surprising for someone with the income of a successful doctor. So, this means that the insurance company wouldn’t be reducing her financial risk very much.

From the discussion of utility of money in my last post, both the doctor and the insurance company qualify as rich for the amounts of money at stake here. It must be that one of the two parties was getting a bad deal, and in this case, it was the doctor.

The doctor would have been better off with a plan that only paid for treatment costs above some amount, like $5000 per year. She could easily afford the first $5000 each year, and the premiums for this type of insurance would be much less than $400 per month. Such a plan would actually protect her against real financial risk instead of only covering an amount she could easily afford anyway.

The various medical insurance plans I have had through employers had similar problems. There were yearly caps on all types of coverage: $500 for physiotherapy, $200 for glasses, etc. These plans were nice to have, but they weren’t really insurance because they didn’t reduce my risk of financial ruin. I just thought of them as a little extra income. If any expensive medical problem came up, I was on my own.